EU considers protecting savers against future bank collapses

John O'Donnell

BRUSSELS (Reuters) - Depositors should be the very last to suffer losses when a bank collapses, according to a proposal being discussed by European Union countries and seen by Reuters, which would shield savers from the kind of losses they face in Cyprus.

The idea comes as member countries finalize a new draft law for the European Union that could make losses for larger savers a permanent feature of future banking crises. EU officials, however, are nervous that such a regime will panic savers, prompting them to withdraw money.

In the paper, outlining the process of 'bailing in' savers and other steps to deal with troubled banks, officials in Brussels said that it might be wise to put depositors behind all bondholders when dividing losses from a bank collapse.

Small savers, with less than 100,000 euros, will, in any event, be protected. But officials also raise the possibility of allowing national exemptions from losses for big depositors in their country if a bank fails.

By striking such a compromise, officials hope to rebuild confidence after a botched attempt earlier this year to impose losses on depositors in Cyprus - initially also aimed at small savers although this was later changed.

Ireland, which currently holds the rotating EU presidency, is also pushing for such concessions ahead of a meeting of EU finance ministers in May.

"This would mean that they are not excluded from bail-in, but other creditors would first absorb losses to their capacity before eligible depositors are bailed-in," officials said in the paper, dated April 29.

Before any such softening of provisions, however, EU diplomats will need to convince Germany, which remains skeptical about making such concessions, according to one official familiar with the talks.

Policymakers have sought to portray the losses suffered by depositors at two of Cyprus's banks as a one-off, but experts believe it marks a change in approach in how Europe deals with troubled banks, sparing taxpayers who have been on the hook for previous bailouts.

"After Cyprus, a number of states would like more clarity," said one official who is involved in the discussions.

"It may be that we give depositors preference, which means that they have a higher likelihood of getting back their money."